The Skeptical Optimist

Government Bankruptcy, and a Two-part Brain Teaser on Hyperinflation

Those who spread fear of the future (...should the other party be in charge, of course) like to use the word “bankruptcy” in their talking points about the federal government’s finances.  Why?  Because that word is a real attention-grabber.  Both sides have tossed that word out at one time or another during their stump speeches and fund-raising events, invariably to describe what the other party has done, is doing, and will do to the country’s finances.  Medicare will be bankrupt; the baby boomers will bankrupt social security; the USA will be bankrupt in ten years; we're bankrupting our grandchildren; the USA is already bankrupt.

Sound familiar?  That word has become almost as overused as "groovy" was back in the '60s (...although I personally preferred "far out").

But using the word “bankruptcy” is just a rhetorical scare tactic (...unless the person using it really does not understand monetary economics, in which case it's just plain ignorance—which, fortunately, is fixable).  The reason is quite simple: In any scenario short of hyperinflation, it is impossible for the federal government of the USA to become incapable of paying its obligations in money backed by the federal government of the USA.  (Reread that sentence.)  The word “bankruptcy” should be a red flag to listeners whenever anyone uses it to describe our federal government’s finances. 

But what about the Weimar Republic?
Well, that was hyperinflation, which is the monetary equivalent of the big no-no in computer programming: dividing by zero.  (When a dollar buys one loaf of bread, the price of a loaf of bread is $1 ÷ 1 loaf, or one dollar; but when a dollar buys zero loaves of bread, the price of a loaf of bread is $1 ÷ 0 loaves, or infinity dollars—and not even the federal government can print that many.)  Hyperinflation is not the result of a government “running out” of money; it is the result of that government allowing way, way too much of it to be created. 

Again: It is impossible for the federal government to run out of its own money, but it is not impossible for it to create hyperinflation.  So why don’t the politicians, journalists, and so-called policy wonks use the word “hyperinflation” in place of the word “bankruptcy” in their stump speeches, fund-raisers, and talking points?  Bankruptcy is not possible, hyperinflation is; why don’t they just call a spade a spade?  Do they not understand monetary economics?  Or are they being dishonest because of some hidden agenda?  (In either case, we have a big problem that needs correcting.) 

Next time we hear anyone warning us of impending “bankruptcy,” let’s interrupt and ask, “Wait, don’t you mean ‘hyperinflation’ instead of ‘bankruptcy’?”  I’ve often wondered why our so-called economics correspondents never ask that question.  It’s time someone started, don't you agree?

Two-part Hyperinflation Quiz
Now that we know federal government bankruptcy is impossible, we can shift our sights to the one true monetary black-hole-to-be-avoided, hyperinflation.  What would cause it (...deficits maybe?), and what is the supporting historical evidence?  What would prevent it (...surpluses, maybe?), and how do we know?  What are the signals?  How accurately do we measure inflation?  How far ahead of time can we tell it’s getting out of hand?  Those are important questions, which I’ll address in future articles (...not that I know all the answers; I just know a lot of the questions, and that several of the answers do not support conventional wisdom). 

For now, here’s a two-part brain-teaser about avoiding hyperinflation.

Part 1: Spot the flaw in Joe’s logic

Joe had a deathly fear of being killed by heat stroke.  His research revealed that his chances of getting heat stroke were highest at the equator, and lowest at the north pole.  Joe concluded that he should move to the north pole, to minimize his chances of death by heat stroke. 

Part 2: Spot the flaw in Sam’s logic

Joe had an uncle named Sam, who had a deathly fear of being killed by hyperinflation.  Uncle Sam’s research revealed that the chances of triggering hyperinflation were highest when too much money is created in the economy, and lowest when little or no extra money creation is allowed.  Uncle Sam concluded that he should dampen, discourage, or even prevent the creation of extra money in the economy, to minimize his chances of death by hyperinflation. 

[Note: Identifying the logic flaw in Part 1 should be easy.  For a hint about how to identify the logic flaw in Part 2, see this first article in a series about money.]

Temporizing

[Temporize: To act evasively in order to gain time, avoid argument, or postpone a decision.]

I read something yesterday that made me want to put my fist through a wall.  But just in time, I remembered the advice my dad gave me when I was a kid: Whenever you feel like that, count to ten very slowly.  That was good advice that still serves me well.  Since yesterday, I’ve been counting to ten a lot—specifically, every time I think about that article I read. 

In case you missed it, here it is:
GAO chief warns economic disaster looms

I knew that meeting in Austin was coming; I wish I could have attended, as I mentioned in a previous post.  I’ve heard the gloom-and-doom message for darn near thirty years now, so I knew what the subject would be, and which numbers would be paraded out to support the message.  What I underestimated, unfortunately, was the gullibility of the press.  Minutes after the article went up on the internet, my email box started overflowing with messages saying: “Hey Steve, look what the bean counters are saying”; “Doom Speak”; “Here they go again”; and “Shouldn’t this guy know better?” 

In short: Yes, they should all know better—and, yes, that includes the Comptroller General of the United States of America.

The gloves are coming off.  In a few days, look (here) for a rebuttal to their road-show doom message.  I’m consulting with several individuals I know around the country, people who understand in detail how our monetary system works, and who ten years ago started helping me understand it.  I hope to include a lot of their input in the article; after all, the doomsday-antidote message I’ve been writing about is not just me talking. 

We simply cannot let the fear peddlers go unchallenged as they spread their doomsday message around the country—with so-called economics correspondents sitting wide-eyed and agape in the audience, swallowing every word hook, line, and sinker, like so many groupies at a rock concert...

Sorry, I’m going to stop here and count to ten, slowly.  I’m temporizing while I plan the rebuttal.

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UPDATE: Here's the rebuttal.

FQ.06.43: Favorite Quote for This Week

People usually don’t like to lose their job and to have to find another one.  It’s anxiety producing.  We also want a never-ending increase in our material well-being.  We can’t have it both ways.  Especially in the United States, the overall interest of the consumer has won out.  We may not like it, but we change jobs...

In the United States, the lack of restraint on the nature of competition has resulted in rapid innovation in new goods and services, and new job creation.  As a result, employment levels have remained high.
—William W. Lewis, The Power of Productivity, p. 265

Oct 2006: USA GDP growth, Q3 advance

No matter how you measure it, GDP growth appears to have slowed.  Some economists are blaming it on the recent slowdown in the housing market—but that situation seems to be stabilizing, which would help turn this into a bump in the road instead of a trend.

In any case, the latest results will probably cause the debt ratio at right to start ticking upwards again; that’s why I took it out to the 8th decimal place, so we could see which way it’s going.  I’ll wait for the end-of-month debt numbers at the Treasury’s website before recalibrating it; should be a few days.

Wouldn’t it be nice to hear more talk from the political candidates about how they propose to help the economy grow faster?  Yeah, I know: Dream on, Steve. 

Income and Wealth, by Alan Reynolds

I've known for months that this book was in the publisher's hands, and it's finally out: Income and Wealth, by Alan Reynolds. 

Income distribution is the topic that invariably comes up in tandem with "economic growth"—but I've been holding off commenting much about the distribution question until I could get my hands on this book.

Alan Reynolds is one of my favorite authors, because he deals in facts and logic, not political agendas (visible or hidden).  Especially when the topic is economics, that's like finding a diamond in the rough.  I'm almost halfway through the book, and it's every bit as good as I'd hoped and expected.  I'll write a summary after I finish, but I wanted to get this recommendation up now, in case you're running short on reading material.  In my opinion, it is worth every dollar. 

If you're expecting confirmation of the gloomy conclusions typically derived from statistics about income distribution, you are in for a big surprise.  In any case, I couldn't resist pulling the following quote out of his Introduction, because it summarizes what I like best about Alan Reynolds:

I accept nothing as an article of faith.  I want to hear the logic and see the evidence.  And you should demand nothing less.  In the absence of logic and evidence you should not give a hoot about my opinion.  Reality is not a matter of opinion.

More later, after I've finished reading it.

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[Full disclosure: 1: He lists my blog in the appendix. 2: If you and one other person each buy the book by clicking through the link above, I will make enough money from Amazon to go to Starbucks and buy a medium regular coffee if Republicans retain a majority, or a small coffee plus a donation to my personal tax-hike-abatement fund if Democrats achieve a majority.]

Energy, post 7: A 21st Century “GI Bill”

This is the seventh and final article in my energy series.  The first six articles (1, 2, 3, 4, 5, and 6) established why I think the top priority should be speeding the arrival of oil independence day for national security reasons, why the likely path will be new technologies that allow us to “fill up” our cars by plugging into the electric grid, and how a by-product of success ironically could be speedier achievement of large-scale reductions in CO2 emissions (worldwide, not just in the USA). 

It’s a good thing I have no plans to run for political office—ever—because there’s something in this article to make EVERYONE mad at me, regardless of their political persuasion.  Here are a few examples:

• Many right-wingers won’t like the government spending or the immigration ideas. 

• Many left-wingers won’t like the immigration ideas, either—let alone the Carrot Economics that, if successful, will turn private-sector problem solvers into (yet more of those despised) rich people, possibly including the world’s first trillionaires. 

• Some libertarians won’t like the government intervention intended to steer and speed up the free market. 

• Debt phobes won’t like the answer to the question “How the heck would we pay for all that?”

• Entrenched fat cats in the oil industry won’t like a government-sponsored program that would render their hundred-year-old business obsolete within just a few years, unless they shift gears quickly and get with the program. 

• Smug elitists of the Clooneythink variety won’t like mean, evil old America causing Arab-world unemployment to skyrocket high above even today's levels by transforming their oil from "black gold" into obsolete, slimy, useless gunk.  [Clooneythink, by the way, is the basis for the plot of Syriana, one of the most infuriating propaganda pieces I’ve ever forced myself to sit through. Obviously, the root cause of Arabs' problems is the United States of America, its evil leaders, its evil military, and its evil corporations; just watch the movie if you don't believe it.]  Higher unemployment for Arab youth is obviously no way to achieve the important Clooneythink goal of making them all start loving us and stop hating us. 
[By the way, if you need a helpful antidote to Clooneythink overload, read this for a slightly different perspective as to the causes of Arab unemployment and misery.]

Yes, there’s something in this to make everyone mad at me.  My one consolation is this: That doesn’t phase me in the slightest.  On the contrary, for me this is a lot of fun; it’s what I do.  So let’s get started... 

What the Wall Street Journal forgot to mention about the war

Greg Mankiw’s blog pointed me to the Friday editorial in the Wall Street Journal, titled “Our Small Defense Budget: This is no way to fund a war.”  I read it, and it struck me that something very important was missing from their analysis—so I took the liberty of adding the missing information to the chart.  In short, the missing piece is this: One of the primary purposes of a national security budget is to prevent wars from starting in the first place—a.k.a. "peace through strength."  Reagan knew what that meant, and he followed through on his conviction.  But our collective memory of what he accomplished apparently faded. 

My notations are in color; self explanatory, I hope.  For more detail on this important topic, see the article I wrote almost two years ago, titled “Rethinking the Surplus.”

Please note that "national security" comes from more than just the defense budget.  I prefer the broader description that stuck with me after I read it ten years ago:
National security is the combined result of four key elements:

(1) intelligence;
(2) diplomacy;
(3) military force potential; and
(4) the will to use #3 if necessary.

Lastly, I think the quote I posted a week ago bears repeating here—especially for anyone who still thinks wistfully back to the late-90s surpluses.

A science [economics] that can describe minute changes in the price of a bushel of corn does not even try to place a value on any aspect of human welfare.  To the old economists, surplus corn warehoused in silos is more valuable than all of the lives saved by avoiding a war.  Because they are unable to place an exact value on human life and happiness, as you can on a bushel of corn, the old economists don't even try to give it any value at all. And they blithely dismiss those who do.
—Dr. Rick Boettger

FQ.06.42: Favorite Quote for This Week

Where large organizations are relied upon for economic expansion and development - that is, where small organizations find little opportunity to multiply, to find financing, and to add new work to old - the economy inevitably stagnates. 
—Jane Jacobs

Deficits and the national debt: The two toughest questions of all

[When it comes to deficits and the national debt, which type of thinker are you: Type A, Type B, or Type X?  How you answer the two questions below will help diagnose which it is.]

As we all know, when we let the tough questions slide instead of facing up to them, we're taking the easy way out.  Procrastinating is something most of us have done at one time or another—but most of us have learned, usually the hard way, that reckoning day always arrives sooner or later.  That's when the tough questions simply cannot be avoided any longer. 

I think, or at least hope, that reckoning day is upon us regarding the deficit and the national debt.  After many decades of avoiding the issue, it's time for us to belly up to the bar, face the two toughest questions of all, and answer them honestly. 

So, regardless of how uncomfortable the following two questions make us as we read them, just this once let's try to come up with honest answers:

1. What set of current financial conditions would convince you that the deficit and national debt are not creating financial hardships today?

2. What set of future financial conditions would convince you that permanent deficits and a much larger national debt did not weaken the nation's financial condition compared to today?

Disquieting questions, aren't they?  That's because they are both derived from the one question that psychologists tell us is uncomfortable for just about anyone, no matter which of our sacred beliefs is being called into question: "What would make you change your mind?"  That question challenges our worldview, forces us to think outside our comfort zone, and puts us in the dissonant position of possibly having to make a few changes in our thinking. 

Some of us, the "Type X Thinkers," will simply dismiss the two deficit/debt questions out of hand, as follows:

How can my worldview be wrong?  Those two questions are just plain stupid; forget it, it's not even worth answering them.  Anyone who would even ask those must be the dumbest person on the planet.

In other words, for Type X Thinkers, evasion (frequently camouflaged by tantrums and changes-of-subject) will once again become the easy way out. 

Others of us might engage in a line of thought along these lines:

Let's see, debt is supposed to be bad because, sooner or later, it results in some combination of inflation, high interest rates, a laughingstock dollar, budget-busting interest on the debt, and high tax rates.  Therefore, if those conditions are not the case now, and did not come about in the future even if we kept running deficits, I guess I'd have to think about possibly modifying my worldview. 

To follow up, we'd then go get some data, asking and answering more questions as our discovery process unfolded:

We've been mostly in deficit and debt-runup mode for decades; is that bad?  Well, let's see: Inflation has been low and predictable for more than twenty years; that's good for lenders.  Interest rates have behaved similarly, and they are currently flat or falling; that's good for borrowers. A loaf of bread still costs a dollar, not a wheelbarrow full of dollars; that's good for consumers.  Tax rates today are lower than they've been in a long time; that's good for taxpayers.  Interest on the debt is less than ten percent of tax receipts, lower than it's been in years; that's good, too.  Supposedly, financial doomsday has been "just around the corner" for at least the last thirty years—but it's starting to look as elusive as that troll I always thought lived under the bridge but perplexingly never did jump out and gobble me up; that's good news, too. 

In short, if deficits and debt are bad, then where's the bad news?  Truth is, our deficits and debt haven't had many bad effects at all yet.  Furthermore, if we can find a way to keep inflation, interest rates, the dollar, interest on the debt, and tax rates at or near today's values—in spite of permanent deficits and growing debt—maybe future generations wouldn't be so bad off after all.  Maybe; just maybe... 

As a result of that thought process, some of us, the "Type A Thinkers," will change our minds about fearing deficits and debt per se, thereby following John Maynard Keynes's lead when he said:

"When my information changes, I change my opinion; what do you do, Sir?" 

Others of us, however—the Type B Thinkers—will no doubt revert back to the old worldview:

Look: Don't confuse me with the facts; this is the no-spin zone, sir.  Deficits and debt are bad, period.  You know it, I know it, and the American people know it.  That's my story, and I'm sticking to it.

There you have it.  Are you a Type A, Type B, or Type X?  (FYI: I used to be a Type X Thinker.  Twelve years ago, I morphed into a Type A.) 

Energy, Post 6: A tankful of electrons

[This is article six in the energy series.  I plan to publish the seventh and final article later this week.] 

In the last article we saw why oil independence will require a technological breakthrough in personal transportation vehicle technology, and that one of the major obstacles is our inability (so far) to store 300 vehicle-miles of potential electrical energy in a small, affordable, mobile, sufficiently-safe package.  The diagram below summarizes our energy sources and uses.  Because liquid fuels are the only practical way (today) of storing energy in high-density forms for end-use consumers, we’re hooked on oil; conversely, if we figure out how to store a sufficient amount of electrical potential in some kind of super-battery, we would no longer be hostage to oil for personal transportation.  We could light up the dotted gray arrow below, and plug into the electric grid.  The oil age would end, but not because we ran out of oil.